We have noted the recent decreases in the price of the shares and the significant trading volume involved of Huabao International Holdings Limited (the “Company”). Save as disclosed below, we are not aware of any reasons for such incidence.

We have been recently notified by Ms. CHU Lam Yiu, the controlling shareholder of the Company, of her entering into a derivative transaction on 14 October 2011 relating to a long position of a monetary value equivalent to 94,736,842 shares of the Company with a contract period starting from 14 October 2011 to 13 January 2013...

I have a simple question: what is the "derivative transaction" that Ms. CHU Lam Yiu entered into regarding over 94 million of her shares?

22 comments:

While the press release doesn't exactly inspire confidence, it's not completely clear to me that "derivative transaction...relating to a long position" necessarily means an offsetting transaction. Couldn't it mean for example that she purchased call options outright? Or sold puts? Seems improbable but the language is not as clear as you suggest!

Clearly the derivative involves an exposure to the stock price that is short, not long, as it is being used to explain a massive sudden *drop* in the stock price - ie, whoever is the counterparty had to hedge the derivative by selling, not buying. Very interesting, and the failure to provide details is super dodgy.

The stock has tanked a long way already but I suspect that a substantial part of this company's supposed business doesn't actually exist! I spoke to a fund manager today and mentioned this to him, and it turns out that he actually met with Huabao around 3 years ago and asked to inspect their factories, and he said that there was simply nothing there, nothing going on - they gave some kind of sketchy excuse about the factories just happening to not be running at the time of his visit.

I wonder if you can actually cut down on a huge chunk of your own work, John, and just short en masse stocks that company's own management is selling (straight or via derivatives).They normally have that work done for'ya when they execute that :)))

J, your implicit assumption is that she is has initiated an effectively short/hedged position, which is understandable given the not so unambiguous wording used in the filing.

This might help:Nomura Comment: We believe that the chairwoman's long position is positive for the shares. Based on our conversations with management, Ms Chu chose to take a long position via derivative transactions rather than buy shares directly because it could leave the chairwoman more flexibility to take a positive position on Huabao's shares in the next 15 months. According to regulations, the controlling shareholder cannot increase their stake by more than 2% in one year otherwise it would trigger a general offer. Note that the chairwoman already increased her stake by 0.7% in Sep 2011. However, through the derivative transaction, any shares of Huabao she buys won't be under her name. Based on the terms of the derivative, Ms Chu can buy 3% of outstanding shares in the 15 months. If based on today's closing price, she would use at least HKD414mn. We believe that this means the chairwoman remains positive with regards to the company's fundamentals.

If she things the company is in trouble, wants to retain control, then a monetization is the best bet; a nice little forward sale, allowing here to keep notional ownership but reducing her capital commitment. Bet you a fiver that she's done with several countparts...

I have to agree with the last contributor. The price action is a clear indicator of direction. The only question is whether the transaction is a put option or a short forward. Given the size of the price movement, I suspect that the deltas are rapidly converging and (assuming that the put was bought "at the money") there is now effectively little difference between the two.

The puzzle for me is the identity of the cowboy who would stand on the other side of such a transaction. They are probably not very happy at the moment.

John do you have any opinion on MUCH smaller fragrances company, which has recently branched into flavors as well, Ecogreen Fine Chemicals (2341.HK)? I have always wondered about the enormous claimed returns on capital and bizarre capital allocation. Don't know if it's good/bad/ugly.

My God I laugh at the retards thinking she might be taking long exposure. The move in the underlying stock makes that very clear, and besides, what sort of semi-sensible executive ever INCREASES their exposure to the company that employs them voluntarily. Very few.

Just read on FT Alphaville, Anonymous Analytics just published a pretty comprehensive destruction job of the queen of cash out...along with a pledge to release the encryption code should any of its people be threatened by the 'real' people behind the pump and dump

General disclaimer

The content contained in this blog represents the opinions of Mr. Hempton. Mr. Hempton may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Hempton's recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.